Trucking in 2017: A Year in Transition

2015 was the beginning of a relatively down environment in the for-hire marketplace. That continued into 2016 – although we seemed to have found some stability, and even signs of improvement, as we finished off the year. We are now entering a year in which numerous events are creating a year of change in that environment.

The quick list comes down to 4 key elements:

The President

Inventories

Fuel

ELDs

Trump: President Trump represents the potential for a dramatic shift in both foreign and domestic policy. While any new administration is rather unlikely to dramatically impact economic growth in their first year, the news cycle is expected to be driven by the political cycle more so than in the past. After 2017, the policies that get implemented (taxes, regulations, infrastructure, trade) could begin to have noticeable impacts on the market. The one area that could have quicker reactions would be in the trade environment, and the President has substantial powers in this arena.

Inventories: The inventory issues of the last year or two seem to be slowly dissipating. However, we are not seeing the usual ‘correction’ in inventories that we typically see. If this is the new normal for inventories then the recent stabilization and improvement in market demand will be sustained into 2017. If not, then a further correction would be expected in 2017 that would weigh further on truck moves. Right now that does not look to be the case, but it is something worth keeping an eye on aswe move into the new year.

Fuel: Oil prices are moving up once more and will lead to higher diesel prices if they are sustained. Further upward acceleration seems unlikely given current market dynamics, but those dynamics have been known to turn on a dime on the past. Fuel should be mostly a pass-through cost, but rapid changes can significantly impact cash flow. In addition, shippers pay the full cost and sharp spikes in pricing lead them to consider alternative sources for their transport moves. Understanding how costs are impacting your customers will help you better plan for changes that will occur in the marketplace.

Regulations: There is a very big list of regulations that directly impact a trucker’s productivity (20+), but there is really only one that matters in 2017: Electronic Logging Devices (ELD). The biggest issue that trucking will face in 2017 is the implementation of the ELD mandate at the very end of the year. There are several unknowns regarding how this will play out over the year, but there are a handful of items we do know. First, most large carriers are already utilizing or implementing ELDs. Second, most small carriers have not yet started to implement ELDs. Third, putting ELDs into use can create a significant hit to productivity: up to a 6% hit for fleets that were diligent with their HOS compliance, a greater than 10% hit for those that are not. We know from the last major regulatory change (HOS in 2013) that the market can swing rapidly due to a few percentage points of change in productivity. If ELDs are implemented in strong fashion during 2017, the market will tighten up considerably and pricing could begin to spike by the end of the year. If the small fleets delay as much as possible, then the impact gets shifted into early 2018 and 2017 rate increases will remain subdued.

One reaction to the Trump election is the potential for large scale reductions in the regulatory agenda. This is most likely true, but (again) is mostly a 2018 event rather than 2017. ELDs are already on the books and set for implementation. It will be much easier for the new administration to halt or delay scheduled rule-making. Plus, safety regulations for trucking have a tendency to be non-partisan and highly favored by the public. This would seem to limit the exposure for dramatic changes in 2017.

Additional Items

CV Equipment: The market for new class 8 trucks and trailers has been certainly more depressed in 2016 versus the very strong market in 2015. That is likely to continue into 2017 as fleets are reluctant to add capacity until rates rebound and capacity tightens up further. The ELD impact could begin to be felt by next fall’s order season. The market has stabilized with ~20,000 trucks ordered in November (+18% y/y). This level is roughly half of that ordered in 2014 but right in line with the same month in 2011, 2012, and 2013.

Spot Market Activity: The Dry Van market showed significant improvement around Memorial Day and has stayed that way all the way through the end of the year. However, Flatbed continued to show a relatively weak environment throughout the summer. That changed about 4 months ago. The spot Flatbed sector typically eases back towards the end of the year (construction begins to wind down and the available truck capacity goes up), but this year it moved UP!

In October, spot market load volumes on Truckstop.com were up a very strong 20% compared to October of 2015. The Cass Freight Index has started to show some similar results and the November ATA tonnage index saw a big uptick after 2 weak months. Rates will still take a little longer to accelerate back up, but broker-posted rates at the end of 2016 were at or above their prior year levels.

Conclusion

If you’re a trucker keep tuned for more good news ahead. If you’re a shipper or a broker make sure that you are ready to operate in a shifting market.